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Best Buy posts $13 million loss in fiscal Q3 on lowered $10.75 billion in revenue

Best Buy had warned that its fiscal third quarter wouldn't be great, and the company clearly isn't putting on any rose-tinted glasses. Its revenue declined year over year from $11.15 billion to $10.75 billion, and it swung from $173 million in profit on continuing operations last season to $13 million in losses this time around. While the company hasn't drilled into the specifics of what led to the downturn, it's pointing to trends of the "last three years" as the culprits -- we'd say that's shorthand for shifts towards online sales and away from traditional electronics like TVs. Whatever the specifics, the company doesn't expect an immediate turnaround and has lowered its guidance for free cash flow in the next fiscal year from a minimum $1.25 billion to $850 million. If there's a ray of sunshine, it's that the big-box store chain already knows the belt tightening needs to continue: it recently kicked off a Renew Blue strategy that it hopes will improve our shopping experience and get its own fiscal house in order.

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Best Buy Confirms Significant Decline in Fiscal Third Quarter 2013 Earnings Previously Announced on October 24

Adjusted (non-GAAP) diluted EPS of $0.03

GAAP EPS of ($0.04)

MINNEAPOLIS--(BUSINESS WIRE)--Nov. 20, 2012-- Best Buy Co., Inc. (NYSE: BBY) today announced a GAAP net loss from continuing operations of $13 million, or $0.04 per share, for the three months ended November 3, 2012 compared to net earnings from continuing operations of $173 million, or $0.47 per diluted share for the prior-year period. Excluding previously announced restructuring charges, adjusted (non-GAAP) net earnings from continuing operations for the third quarter of fiscal 2013 were $10 million, or $0.03 per diluted share compared to $173 million and $0.47 for the prior-year period. Comparable store sales were down during the quarter and adjusted (non-GAAP) operating income declined significantly.

Three Months Ended

Nov. 3, 2012

Oct. 29, 2011

Change

Comparable store sales % change1

(4.3%)

(0.7%)

(360bps)

Adjusted (non-GAAP) operating income2

$48

$381

(87%)

GAAP Operating income

$12

$381

(97%)

Adjusted (non-GAAP) diluted EPS from continuing operations2

$0.03

$0.47

(94%)

GAAP EPS from continuing operations

($0.04)

$0.47

--

Adjusted return on invested capital3

10.1%

10.7%

(60bps)

"In line with trends experienced over the last three years, Best Buy's third quarter financial performance was clearly unsatisfactory. OnNovember 13, we shared our candid assessment of Best Buy's situation and unveiled Renew Blue, a set of priorities to begin re-invigorating the company's performance and rejuvenatingBest Buy. The results we are reporting today only strengthen our sense of urgency and purpose," saidHubert Joly,Best Buypresident and CEO.

Domestic Segment

Operating Income

Excluding restructuring charges primarily related to previously announced store closures, the Domestic segment operating income for the three months endedNovember 3, 2012declined to$50 million($16 millionon a GAAP basis) from$249 millionin the prior-year period. The decline was due to a lower gross profit rate, higher SG&A expense and lower revenue.

Best Buyrecorded revenue of$431 millionin its online business, with growth in excess of 10 percent, and registered positive comparable store sales growth in mobile phones, appliances and tablets/eReaders. This growth was more than offset by comparable store sales declines in notebooks, gaming, digital imaging and televisions. The company believes that tablet and notebook comparable store sales were negatively impacted by slower consumer purchasing in anticipation of major product launches.

Gross Profit

Domestic segment gross profit was$1.9 billionand decreased 9 percent, reflecting a rate decline of 100 basis points compared to the prior-year period. The gross profit dollars were helped by the growth of mobile phones but the rate suffered from unfavorable product mix in mobile phones and televisions, as well as from the impact of product transitions ahead of key new launches.

Selling, General and Administrative Expenses ("SG&A")4

Domestic segment SG&A expense was$1.8 billionand increased 1 percent compared to the prior-year period. This increase was due to increased training and higher compensation costs for sales associates, as well as executive transition costs. Excluding the impact of these costs and the absence of the Best Buy Mobile profit share payment, Domestic SG&A expense was approximately flat compared to the prior-year period.

International Segment

Operating Income

Excluding previously announced restructuring charges, the International segment reported an adjusted operating loss of$2 million($4 millionon a GAAP basis) for the three months endedNovember 3, 2012. The decline was due toCanada,EuropeandChina, driven by lower revenue inCanadaandChinaand lower gross profit inEurope.

Revenue

The International segment revenue was$3.1 billionand declined less than one percent compared to the prior-year period. Comparable store sales declined 5.2 percent, as comparable store sales growth inEuropewas more than offset by declines inCanadaandChina.

Gross Profit

International segment gross profit was$731 millionand declined 11 percent, reflecting a rate decline of 280 basis points compared to the prior-year period. The rate decline was driven primarily byEuropeand due largely to increased mix of lower-margin wholesale sales, and a price competitive environment for mobile phones coupled with mix into more expensive handsets.

Selling, General and Administrative Expenses4

International segment SG&A expense was$733 millionand increased 7 percent compared to the prior-year period. Excluding the impact from the absence of the Best Buy Mobile profit share payment, International SG&A expense was flat compared to the prior-year period.

Please see the table titled "Reconciliation of Non-GAAP Financial Measures" attached to this release for more detail.

The company currently expects to generate free cash flow5in the range of$850 million to $1.05 billionfor fiscal 2013. This amount compares with the company's previously communicated range of$1.25to$1.5 billionthat had been provided onAugust 21, 2012. The company's free cash flow guidance excludes the impact of previously announced restructuring activities and includes a change in restricted cash related to working capital.

Holiday Sales Results

The company is planning to announce revenue results for the nine weeks endingJanuary 5, 2013(fiscal November and December) onJanuary 11, 2013.

Conference Call

Best Buyis scheduled to conduct an earnings conference call at9:00 a.m. Eastern Time(8:00 a.m. Central Time) onNovember 20, 2012. A webcast of the call is expected to be available on its Web site atwww.investors.bestbuy.comboth live and after the call. A telephone replay is also available starting at approximately12:00 pm Eastern Time(11:00 a.m. Central Time) onNovember 20 through November 27. The dial-in number for the replay is 800-406-7325 (domestic) or 303-590-3030 (international), and the access code is 4573748.

(1)Best Buy's comparable store sales is comprised of revenue at stores, call centers, and websites operating for at least 14 full months as well as revenue related to other comparable sales channels. Relocated stores, as well as remodeled, expanded, and downsized stores closed more than 14 days, are excluded from the comparable store sales calculation until at least 14 full months after reopening. Acquired stores are included in the comparable store sales calculation beginning with the first full quarter following the first anniversary of the date of the acquisition. The portion of the calculation of the comparable store sales percentage change attributable to the International segment excludes the effect of fluctuations in foreign currency exchange rates. The method of calculating comparable store sales varies across the retail industry. As a result, Best Buy's method of calculating comparable store sales may not be the same as other retailers' methods.

(2) The company defines adjusted operating income for the periods presented as its reported operating income for those periods calculated in accordance with accounting principles generally accepted in the U.S. ("GAAP") adjusted to exclude the effects of previously announced restructuring charges. In addition, the company defines adjusted net earnings and adjusted diluted earnings per share for the periods presented as its reported net earnings and diluted earnings per share calculated in accordance with GAAP adjusted to exclude the effects of the restructuring charges.

These non-GAAP financial measures provide investors with an understanding of the company's operating income, net earnings, and diluted earnings per share adjusted to exclude the effect of the items described above. These non-GAAP financial measures assist investors in making a ready comparison of the company's operating income, net earnings, and diluted earnings per share for its fiscal quarter endedNovember 3, 2012, against the company's results for the respective prior-year periods and against third party estimates of the company's diluted earnings per share for those periods that may not have included the effect of such items. Additionally, management uses these non-GAAP financial measures as an internal measure to analyze trends, allocate resources, and analyze underlying operating performance. Please see "Reconciliation of Non-GAAP Financial Measures" attached to this release for more detail.

(3) The company defines adjusted return on invested capital ("ROIC") as adjusted net operating profit after taxes divided by average invested capital for the periods presented (including both continuing and discontinued operations). Adjusted net operating profit after taxes is defined as our operating income for the periods presented calculated in accordance with GAAP adjusted to exclude the effects of: (i) operating lease interest; (ii) investment income; (iii) net earnings attributable to noncontrolling interests; (iv) income taxes; (v) all restructuring charges in costs of goods sold and operating expenses, goodwill and tradename impairments, and costs related to the purchase of CPW's share of the Best Buy Mobile profit share agreement ("Best Buy Europe transaction costs"); and (vi) the noncontrolling interest impact of the restructuring charges, Best Buy Europe transaction costs and the purchase of CPW's share of the Best Buy Mobile profit share agreement. Average invested capital is defined as the average of our total assets for the trailing four quarters in relation to the periods presented adjusted to: (i) exclude excess cash and cash equivalent and short-term investments; (ii) include capitalized operating lease obligations calculated using a multiple of eight times rental expenses; (iii) exclude our total liabilities, less our outstanding debt; and (iv) exclude equity of noncontrolling interests.

This non-GAAP financial measure provides investors with a supplemental measure to evaluate how effectively the company is investing its capital and deploying its assets. Management uses this non-GAAP financial measure to assist in allocating resources, and trends in the measure may fluctuate over time as management balances long-term initiatives with possible short-term impacts. Our ROIC calculation utilizes total operations in order to provide a measure that includes the results of and capital invested in all operations, including those businesses that are no longer continuing operations. Please see "Reconciliation of Non-GAAP Financial Measures" attached to this release for more detail.

(4) As a reminder, year-over-year SG&A comparisons for both Domestic and International segments were impacted by the absence of theBest BuyMobile profit share payment in fiscal 2013 as a result of the purchase ofCarphone Warehouse Groupplc's ("CPWs") share of the Best Buy Mobile profit share agreement in the fourth quarter of fiscal 2012. These intercompany profit share payments previously increased Domestic segment SG&A expense while lowering International segment SG&A and had no impact on the company's consolidated SG&A.

(5)Best Buydefines free cash flow as total cash (used in) provided by operating activities less additions to property and equipment. This non-GAAP financial measure assists investors in making a ready comparison of the company's expected free cash flow for the year endingFebruary 2, 2013, against the company's results for the respective prior-year periods and against management's previously provided expectations. The company's free cash flow guidance excludes the impact of previously announced restructuring activities and includes an expected benefit from a change in restricted cash related to working capital, which is included within investing activities on the condensed consolidated statements of cash flows.

Forward-Looking and Cautionary Statements:

This news release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 as contained in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 that reflect management's current views and estimates regarding future market conditions, company performance and financial results, business prospects, new strategies, the competitive environment and other events. You can identify these statements by the fact that they use words such as "anticipate," "believe," "estimate," "expect," "intend," "project," "guidance," "plan," "outlook," and other words and terms of similar meaning. These statements involve a number of risks and uncertainties that could cause actual results to differ materially from the potential results discussed in the forward-looking statements. Among the factors that could cause actual results and outcomes to differ materially from those contained in such forward-looking statements are the following: general economic conditions, changes in consumer preferences, credit market constraints, acquisitions and development of new businesses, divestitures, product availability, sales volumes, pricing actions and promotional activities of competitors, profit margins, weather, natural or man-made disasters, changes in law or regulations, foreign currency fluctuation, availability of suitable real estate locations, the company's ability to react to a disaster recovery situation, the impact of labor markets and new product introductions on overall profitability, failure to achieve anticipated benefits of announced transactions, integration challenges relating to new ventures and unanticipated costs associated with previously announced or future restructuring activities. A further list and description of these risks, uncertainties and other matters can be found in the company's annual report and other reports filed from time to time with theSecurities and Exchange Commission, including, but not limited to, Best Buy's Annual Report on Form 10-K filed with theSEConMay 1, 2012.Best Buycautions that the foregoing list of important factors is not complete, and any forward-looking statements speak only as of the date they are made, andBest Buyassumes no obligation to update any forward-looking statement that it may make.

BEST BUY CO., INC.

CONSOLIDATED STATEMENTS OF EARNINGS

($ in millions, except per share amounts)

(Unaudited and subject to reclassification)

Three Months Ended

Nine Months Ended

Nov. 3, 2012

Oct. 29, 2011

Nov. 3, 2012

Oct. 29, 2011

Revenue

$

10,753

$

11,145

$

32,910

$

33,370

Cost of goods sold

8,167

8,292

24,853

24,834

Gross profit

2,586

2,853

8,057

8,536

Gross profit %

24.0

%

25.6

%

24.5

%

25.6

%

Selling, general and administrative expenses

2,538

2,472

7,496

7,431

SG&A %

23.6

%

22.2

%

22.8

%

22.3

%

Restructuring charges

36

-

254

4

Operating income

12

381

307

1,101

Operating income %

0.1

%

3.4

%

0.9

%

3.3

%

Other income (expense):

Investment income and other

13

-

25

25

Interest expense

(31

)

(37

)

(94

)

(98

)

(Loss) earnings from continuing operations before income tax expense and equity in loss of affiliates

(1) The calculation of diluted earnings per share assumes the conversion of the company's previously outstanding convertible debentures due in 2022 into 8.8 million shares common stock in the three and nine months ended October 29, 2011, and adds back the related after-tax interest expense of $1.4 and $4.2 for the three and nine months ended October 29, 2011, respectively.

Changes in operating assets and liabilities, net of acquired assets and liabilities:

Receivables

216

322

Merchandise inventories

(1,330

)

(393

)

Accounts payable

967

938

Other assets and liabilities

(1,076

)

(310

)

Total cash (used in) provided by operating activities

(121

)

1,900

INVESTING ACTIVITIES

Additions to property and equipment

(522

)

(580

)

Other, net

110

25

Total cash used in investing activities

(412

)

(555

)

FINANCING ACTIVITIES

Repurchase of common stock

(255

)

(1,056

)

(Repayments) borrowings of debt, net

(200

)

581

Other, net

(152

)

(136

)

Total cash used in financing activities

(607

)

(611

)

EFFECT OF EXCHANGE RATE CHANGES ON CASH

48

1

ADJUSTMENT FOR CHANGE IN FISCAL YEAR

202

235

(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS

(890

)

970

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

1,199

1,103

CASH AND CASH EQUIVALENTS AT END OF PERIOD

$

309

$

2,073

BEST BUY CO., INC.

SEGMENT INFORMATION

($ in millions)

(Unaudited and subject to reclassification)

Domestic Segment Performance Summary

Three Months Ended

Nov. 3, 2012

Oct. 29, 2011

Change

Revenue

$7,673

$8,055

(5%)

Comparable store sales % change1

(4.0%)

0.1%

(410bps)

Gross profit

$1,855

$2,033

(9%)

% of revenue

24.2%

25.2%

(100bps)

SG&A

$1,805

$1,784

1%

% of revenue

23.5%

22.1%

140bps

Restructuring charges

$34

$0

N/A

Operating income

$16

$249

(94%)

% of revenue

0.2%

3.1%

(290bps)

Adjusted (non-GAAP) operating income2

$50

$249

(80%)

% of revenue

0.7%

3.1%

(240bps)

Revenue per square foot (Domestic segment)3

$856

$846

1%

Adjusted operating income per square foot (Domestic segment)3

$36

$43

(16%)

International Segment Performance Summary

Three Months Ended

Nov. 3, 2012

Oct. 29, 2011

Change

Revenue

$3,080

$3,090

(0%)

Comparable store sales % change1

(5.2%)

(3.2%)

(200bps)

Gross profit

$731

$820

(11%)

% of revenue

23.7%

26.5%

(280bps)

SG&A

$733

$688

7%

% of revenue

23.8%

22.3%

150bps

Restructuring charges

$2

$0

N/A

Operating (loss) income

($4)

$132

--

% of revenue

(0.1%)

4.3%

(440bps)

Adjusted (non-GAAP) operating (loss) income2

($2)

$132

--

% of revenue

(0.1%)

4.3%

(440bps)

(1) Best Buy's comparable store sales is comprised of revenue at stores, call centers, and Web sites operating for at least 14 full months as well as revenue related to other comparable sales channels. Relocated stores, as well as remodeled, expanded and downsized stores closed more than 14 days, are excluded from the comparable store sales calculation until at least 14 full months after reopening. Acquired stores are included in the comparable store sales calculation beginning with the first full quarter following the first anniversary of the date of the acquisition. The portion of the calculation of the comparable store sales percentage change attributable to the International segment excludes the effect of fluctuations in foreign currency exchange rates. The method of calculating comparable store sales varies across the retail industry. As a result, Best Buy's method of calculating comparable store sales may not be the same as other retailers' methods.

(2) Excludes the impact of previously announced restructuring charges. Please see table titled "Reconciliation of Non-GAAP Financial Measures" at the back of this release.

(3) Revenue per square foot is equal to the sum of Domestic segment trailing twelve months revenue divided by the average quarterly retail square footage for all U.S. stores, over the same period. Adjusted operating income per square foot is equal to the sum of Domestic segment trailing twelve months adjusted operating income divided by the average quarterly retail square footage for all U.S. stores, over the same period.

The following information provides reconciliations of non-GAAP financial measures from continuing operations to the most comparable financial measures calculated and presented in accordance with accounting principles generally accepted in the U.S. ("GAAP"). The company has provided non-GAAP financial measures, which are not calculated or presented in accordance with GAAP, as information supplemental and in addition to the financial measures presented in the accompanying news release that are calculated and presented in accordance with GAAP. Such non-GAAP financial measures should not be considered superior to, as a substitute for, or as an alternative to, and should be considered in conjunction with, the GAAP financial measures presented in the news release. The non- GAAP financial measures in the accompanying news release may differ from similar measures used by other companies. The following tables reconcile operating income, net earnings and diluted earnings per share for the periods presented for continuing operations (GAAP financial measures) to adjusted operating income, adjusted net earnings and adjusted diluted earnings per share for continuing operations (non-GAAP financial measures) for the periods presented.

Three Months Ended

Three Months Ended

Nov. 3, 2012

Oct. 29, 2011

$

% of Rev.

$

% of Rev.

Domestic - Continuing Operations

Operating income

$16

0.2%

$249

3.1%

Restructuring charges

34

0.4%

0

n/a

Adjusted operating income

$50

0.7%

$249

3.1%

International - Continuing Operations

Operating (loss) income

($4)

(0.1%)

$132

4.3%

Restructuring charges

2

0.1%

0

n/a

Adjusted operating (loss) income

($2)

(0.1%)

$132

4.3%

Consolidated - Continuing Operations

Operating income

$12

0.1%

$381

3.4%

Restructuring charges

36

0.3%

0

n/a

Adjusted operating income

$48

0.4%

$381

3.4%

Net (loss) earnings

($13)

$173

After-tax impact of restructuring charges

23

0

Adjusted net earnings

$10

$173

Diluted EPS

($0.04)

$0.47

Per share impact of restructuring charges

0.07

0.00

Adjusted diluted EPS

$0.03

$0.47

Nine Months Ended

Nine Months Ended

Nov. 3, 2012

Oct. 29, 2011

$

% of Rev.

$

% of Rev.

Domestic - Continuing Operations

Operating income

$394

1.6%

$854

3.5%

Restructuring charges

252

1.0%

5

0.0%

Adjusted operating income

$646

2.7%

$859

3.5%

International - Continuing Operations

Operating (loss) income

($87)

(1.0%)

$247

2.8%

Restructuring charges

2

n/a

(1)

(0.0%)

Adjusted operating (loss) income

($85)

(1.0%)

$246

2.7%

Consolidated - Continuing Operations

Operating income

$307

0.9%

$1,101

3.3%

Restructuring charges

254

0.8%

4

0.0%

Adjusted operating income

$561

1.7%

$1,105

3.3%

Net earnings

$160

$578

After-tax impact of restructuring charges

164

3

Adjusted net earnings

$324

$581

Diluted EPS

$0.47

$1.51

Per share impact of restructuring charges

0.48

0.00

Adjusted diluted EPS

$0.95

$1.51

BEST BUY CO., INC.

RECONCILIATION OF NON-GAAP FINANCIAL MEASURES

($ in millions)

(Unaudited and subject to reclassification)

The following information provides a reconciliation of a non-GAAP financial measure to the most comparable financial measure calculated and presented in accordance with GAAP. The company has provided the non-GAAP financial measure, which is not calculated or presented in accordance with GAAP, as information supplemental and in addition to the financial measure that is calculated and presented in accordance with GAAP. Such non-GAAP financial measure should not be considered superior to, as a substitute for, or as an alternative to, and should be considered in conjunction with, the GAAP financial measure. The non-GAAP financial measure in the accompanying news release may differ from similar measures used by other companies.

The following table includes the calculation of Adjusted ROIC for total operations, which includes both continuing and discontinued operations (non-GAAP financial measures), along with a reconciliation to the calculation of return on total assets ("ROA") (GAAP financial measure) for the periods presented.

Calculation of Return on Invested Capital(1)

Nov. 3, 2012(2)

Oct. 29, 2011(2)

Net Operating Profit After Taxes (NOPAT)

Operating income - continuing operations

$

186

$

2,224

Operating loss - discontinued operations

(241

)

(294

)

Total operating (loss) income

(55

)

1,930

Add: Operating lease interest(3)

594

600

Add: Investment income

47

38

Less: Net earnings attributable to noncontrolling interest (NCI)

(1,212

)

(66

)

Less: Income taxes(4)

(845

)

(999

)

NOPAT

$

(1,471

)

$

1,503

Add: Restructuring charges and impairments(5)

1,760

245

Add: NCI impact of BBYM profit share buyout and restructuring charges

1,202

-

Adjusted NOPAT

$

1,491

$

1,748

Average Invested Capital

Total assets

$

16,665

$

19,587

Less: Excess Cash(6)

(447

)

(1,601

)

Add: Capitalized operating lease obligations(7)

9,498

9,596

Total liabilities

(12,466

)

(12,635

)

Exclude: Debt(8)

2,119

2,177

Less: Noncontrolling interests

(618

)

(713

)

Average invested capital

$

14,751

$

16,411

Adjusted Return on invested capital (ROIC)

10.1

%

10.7

%

Calculation of Return on Assets(1)

Nov. 3, 2012(2)

Oct. 29, 2011(2)

Net (loss) earnings including noncontrolling interests

$

(447

)

$

1,220

Total assets

16,665

19,587

Return on assets (ROA)

(2.7

%)

6.2

%

(1) The calculations of Return on Invested Capital and Return on Assets use total operations, which includes both continuing and discontinued operations.

(2) Income statement accounts represent the activity for the 12 months ended as of each of the balance sheet dates. Balance sheet accounts represent the average account balances for the 4 quarters ended as of each of the balance sheet dates.

(3) Operating lease interest represents the add-back to operating income driven by our capitalized lease obligations and represents fifty percent of our annual rental expense which is the multiple used for the retail sector by one of the nationally recognized credit rating agencies that rates our creditworthiness, and we consider it to be an appropriate multiple for our lease portfolio.

(4) Income taxes are calculated using a blended statutory rate at the enterprise level based on statutory rates from the countries we do business in.

(5) Includes all restructuring charges in costs of goods sold and operating expenses, goodwill and tradename impairments, and the Best Buy Europe transaction costs.

(6) Cash and cash equivalents and short term investments are capped at the greater of 1% of revenue or actual amounts on hand. The cash and cash equivalents and short term investments in excess of the cap are subtracted from our calculation of average invested capital to show their exclusion from total assets.

(7) The multiple of eight times annual rental expense in the calculation of our capitalized operating lease obligations is the multiple used for the retail sector by one of the nationally recognized credit rating agencies that rates our creditworthiness, and we consider it to be an appropriate multiple for our lease portfolio.

(8) Debt includes short-term debt, current portion of long-term debt and long-term debt and is added back to our calculation of average invested capital to show its exclusion from total liabilities.